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Benefiting From the New Bankruptcy Law

How this year's bankruptcy act protects you if one of your customers or tenants files for bankruptcy

This is the second part of a two-part impact review of the new Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 that goes into effect on October 17.

In a previous article, "What to Know About the New Bankruptcy Law," we looked at how business owners can protect themselves against some of the likely results of the new bankruptcy law, including a possible avalanche of bankruptcy filings in September and October this year by those wanting to take advantage of the current bankruptcy law's "easier" provisions.

This article highlights the top four reasons why BAPCPA makes the bankruptcy laws more "business friendly."

Reason #1: Businesses will find it easier to defend against a "preference" claim. As noted in my first article, the current preference law allows a bankrupt company, in many instances, to "claw back" any moneys the company paid to your business within 90 days of the date of the filing of the bankruptcy case.

While preference claw backs will still be part of the bankruptcy law, the good news is that defending against a preference claim will be easier come October 17 for two main reasons.

First, BAPCPA requires that any lawsuit to claw back a preference claim that's for less than $10,000 must be filed in the area where your business is located rather than in the city where the bankruptcy case is located. From a practical standpoint, this change is a huge benefit for businesses. The reason for this is that often the high cost of defending a small preference action of say, $500, often forced businesses to merely pay off a preference claim rather than incur the cost and hassle of hiring a lawyer in a far-away city to defend against the claim.

Second, BAPCPA makes it easier for a business to defend itself against a preference claw back by eliminating the need to prove that the alleged preference payment was made in accord with "industry standards." Rather, the business will merely need to prove that the payment(s) were made in "the ordinary course of business" between the business and the bankrupt company.

Reason #2: It will be easier to recover shipped goods from a bankrupt company. One of a business's worst nightmares is to ship a large order to a customer only to find out after the fact that the customer just filed for bankruptcy.

Currently, if your company ships goods on credit to a company that later goes bankrupt, you only have 10 days after the bankrupt company receives the goods to make a written demand for "reclamation" (i.e., making a legal demand for the return of your shipped goods).

Under BAPCPA, your company will have 45 days to make the written reclamation demand. Even better, if you forget to send your reclamation demand during that time frame, you may still be eligible to receive an administrative expense claim for the value of the goods received by the bankrupt company within 20 days prior to filing for bankruptcy if the goods were sold in the ordinary course of business.

Reason #3: Landlords will love this change (part one). If you're a commercial landlord, one of the truly frustrating aspects of the current bankruptcy law is that a bankrupt commercial tenant has 60 days from the date of filing for bankruptcy to decide whether or not to keep their lease in place. That's bad enough, but bankruptcy courts have been known to grant multiple extensions on top of the initial 60-day period, which has the effect of keeping landlords from being able to get rid of a bankrupt commercial tenant for months, if not years.

Under BAPCPA, a bankrupt commercial tenant now has a fixed time period to decide whether to assume or reject the lease. The initial time period has been extended to 120 days from the date of the bankruptcy filing, but the new law only allows a bankruptcy court to grant one 90-day extension "for cause" only. Any additional extensions must be made with the landlord's consent.

Reason #4: Landlords will love this change (part two). As a commercial landlord, another frustrating experience is to spend the time and money to go to court to obtain a judgment that allows eviction of a commercial tenant only to have the commercial tenant file for bankruptcy which stops the eviction dead in its tracks.

Under BAPCPA, an eviction based on a judgment that was obtained prior to the bankruptcy will not be halted merely by having the tenant file a bankruptcy petition.

As you can see, BAPCPA will give business owners and their companies some additional benefits and defenses if they find themselves mired in the bankruptcy of a customer or a tenant. But despite the favorable changes in the bankruptcy laws, the best bankruptcy advice still remains: Try to avoid doing business with those customers and tenants who are likely to file for bankruptcy in the first place.

Chris Kelleher is an award-winning small-business advisor and attorney. He's also a sought-after speaker and the founder and resident legal guru of The Law Firm For Businesses, a boutique law firm that helps business owners creatively solve their business and legal problems.

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